Philippe Weiller v. Minister of National Revenue, [1993] 1 CTC 2117, [1993] DTC 686, [1993] 1 CTC 2480, [1993] DTC 692

Tremblay, T.C.C.J.:—This appeal was heard in Quebec City on November 6 and 7,1989 and on June 18 and 19, 1991. The latest information regarding the written arguments of the solicitors was received in May 1992.

1. Point at issue

The question is whether the appellant was correct not to include the sum of $99,491.77 in calculating his income for the 1984 taxation year.

In the respondent's submission, the appellant received or benefited from property from the company "Les Promenades du Centre-Ville Inc.” which operated the restaurants “Café Bonaparte Enr." and "Les Jardins du Luxembourg". The appellant maintained he was not a shareholder of the company.

However, according to the respondent, the appellant and an associate actually ran the company using a nominee, namely Mr. Marcel Gauvin, who was Officially the company's sole shareholder. The respondent further submitted that as the appellant had earlier declared bankruptcy and could no longer legally engage in business, he signed an agreement with his associate and Mr. Gauvin setting out each person's responsibilities.

The respondent also maintained that the appellant and his associate regularly appropriated part of the company's receipts. The latter began operations on June 21, 1984 and ended up going bankrupt on November 15, 1984.

In addition to including the sum of $99,491.77 in the 1984 income, the respondent imposed a $3,833.87 penalty for late filing pursuant to subsection 162(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and a penalty of $11,276.11 under subsection 163(1) of the Act for wilfully evading income [sic] by not filing his tax returns.

2. Burden of proof

2.01 The appellant has the burden of showing that the respondent's assessment is incorrect. This burden of proof results from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182.

2.02 In the instant case the facts assumed by the respondent are set out in paragraph 6(a) to (j) of the reply to the notice of appeal. They read as follows:

6. In assessing the appellant for his 1984 taxation year the respondent relied, inter alia, on the following facts:

(a) the company" Restaurant les Promenades du Centre-ville Inc.” was incorporated on July 6, 1983; [admitted]

(b) the operations of “ Restaurant les Promenades du Centre-ville Inc.” began

on June 21, 1984 and ended in bankruptcy on November 15, 1984; [admitted]

(c) "Restaurant les Promenades du Centre-ville Inc.” operated the restaurants “Café Bonaparte", at 680 Grande-Allée, Québec, and "Les Jardins du Luxembourg" and a cafeteria, located at 540 Charest Boulevard East, Québec; [admitted]

(d) Robert Glode and Marc Philippe Weiller operated this company using a nominee, Mr. Marcel Gauvin, officially the company's sole shareholder; [denied]

(e) as the appellant had earlier declared bankruptcy and could no longer legally do business, he signed an agreement with Mr. Robert Glode and Mr. Marcel Gauvin setting out each person's responsibilities; [denied]

(f) in the investigation conducted by the respondent, several witnesses stated that the appellant regularly appropriated part of the receipts from the company's operations and even from credit card cash inflows; [denied]

(g) the respondent was able to make his assessment from the book of accounts and documents obtained from the trustee in bankruptcy Thorne Ridel Inc.; [not known]

(h) on reconciling the company's gross receipts from cash register tapes with entries in the books, the respondent found that the non-reported receipts added up to $164,533.54; [denied]

(i) an amount of $34,450 was added, resulting from the difference in the money diverted by the appellant and Mr. Robert Glode through third parties by falsifying documents; [denied]

(j) the total difference obtained was $198,983.54 and this was divided equally between Mr. Weiller and Mr. Glode, for a total of $99,491.77 each, representing the appellant's share; [denied]

[Translation.]

3. Facts

3.01 During his testimony, Mr. Marcel Gauvin filed two agreements concluded between himself (the party of the first part) and the appellant (the party of the second part), agreements which Mr. Robert Glode signed as intervenor [sic]. These were Exhibits 1-14 and 1-15.

3.02 Agreement I-15, signed on February 9, 1984, has the following introduction:

Whereas Mr. Marc-Philippe Weiller is the owner-occupier of premises in the former "Pàquet" building on Charest Boul.;

Whereas Mr. Marcel Gauvin places his name at Mr. Marc-Philippe Weiller’s disposal for completion of the said project," LES PROMENADES DU CENTRE-VILLE INC.”, and the “LES JARDINS DU LUXEMBOURG” RESTAURANTS, the parties agree as follows, to wit

[Translation.]

3.03 Agreement I-14, signed on April 4, 1984, has the same introductory passage, except that "LES PROMENADES DU CENTRE-VILLE INC.” and the “LES JARDINS DU LUXEMBOURG” RESTAURANTS were replaced by a marginal note,"La Société de Gestion immobilière Locatel Inc. et Cabaret Variété".

3.04 Apart from this introductory passage, the agreements contained 12 similar paragraphs the first ten of which read as follows:

1. Mr. Marcel Gauvin borrows for and on behalf of the restaurant the sum of $200,000 (with no personal guarantee). A balance sheet may be submitted at the Bank’s request.

2. The party of the first part cannot sell or dispose of the restaurant without a time limit; the party of the first part lends his name only for a period of twelve months.

3. The party of the first part will not act as owner or operator of the said restaurant, but will have the right to check the books and balance sheets of the company at his request.

4. The party of the second part undertakes to pay to the party of the first part 25 per cent of the total of the loan obtained on the first disbursements of the loan (or $50,000 on the sale of the restaurant).

5. The party of the second part undertakes to provide the party of the first part with all necessary proof that the restaurant is and will be legally operated in accordance with provincial, federal and municipal regulations.

6. The party of the second part undertakes to make applications for liquor licences, hotel licences and municipal permits in the name of the party of the first part.

7. The party of the second part undertakes to make all rental and loan payments (principal and interest) and pay all taxes in the name of the party of the first part.

8. The party of the first part undertakes to refrain from ever claiming operating profits and any profit on resale of the project from the party of the second part, and the party of the first part undertakes to sign all necessary documents.

9. The party of the second part undertakes in favour of the party of the first part to exercise reasonable care, in the legal sense, with respect to the company at all times.

10. The party of the second part undertakes, to the satisfaction of the party of the first part, to:

(a) pay his provincial and federal taxes when due;

(b) pay his sales taxes regularly;

(c) pay all suppliers when payment is due;

(d) to be answerable for all the restaurant's debts and to pay them off.

[Translation.]

In Exhibit 1-14, the word restaurant" is replaced by the word '"cabaret".

3.05 Mr. Gauvin contended that though his name appeared as president and sole shareholder of the company, the businesses" Les Jardins du Luxembourg” and "Café Bonaparte En r.” were managed by Messrs. Glode and Weiller. There was also the “Cabaret Lido”, but as that business was arranged when Mr. Gauvin was absent (for three weeks in October 1984) he was not involved. If he had been there, he would also have signed as nominee.

3.06 Mr. Gauvin contended that he was forced to pay the Bank $18,000 because he had signed the loan and Mr. Weiller did not repay the debt.

3.07 The cheques were signed by him and by Mr. Weiller.

3.08 The company's opening balance sheet at February 17, 1984 was filed as Exhibit A-4, showing total assets of $39,000 ($38,500 in restaurant equipment and $500 in incorporation fees). It appeared that the principal shareholder was Mr. Marcel Gauvin.

The latter's balance sheet at February 9, 1984 (Exhibit A-3) shows assets (chiefly various properties) totalling $918,000 and liabilities (various mortgages) totalling $165,000, leaving a net equity of $753,000.

3.09 On December 13, 1984, in an agreement filed as Exhibit A-1, Mr. Marcel Gauvin promised to sell Mr. Robert Glode for $1 the share owned by him in Les Promenades Centre-Ville Inc. This sale was to be made within 60 days of acceptance by the creditors of the bankruptcy proposal of November 15, 1984.

3.10 As president and secretary, Mr. Marcel Gauvin represented Les Promenades Centre-Ville Inc. on August 7, 1984 when it purchased the stock-in- trade of Jacquot Motors (1978) Ltd. (Exhibit A-2).

3.11 Mr. Raymond Marcoux, trustee in the bankruptcy of Les Promenades Centre-Ville Inc., testified that the director’s balance sheet in the Registry of the Court was signed by Mr. Gauvin. According to the documents, he was the director and sole shareholder of the company. Mr. Gauvin never told him that he was merely a nominee.

3.12 Mr. Raymond Marcoux filed his bankruptcy report as Exhibit 1-1. It was dated December 3, 1984, that is eighteen days after the date of the bankruptcy.

On the operation of Café Bonaparte Enr., the report indicates that from the operating statement for the period ending August 31, 1984, it appeared that income was some $199,915.43, and the report showed a net profit of $17,155.78. The operations of Café Bonaparte Enr. ceased on October 15, 1984.

With regard to the restaurant Les Jardins du Luxembourg, whose lease was signed by the appellant, the cafeteria started operations on August 9, 1984 and the piano-bar and restaurant on October 16, 1984.

3.13 The statement of the source of funds for Café Bonaparte Enr. and the restaurant Les Jardins du Luxembourg reads as follows:

SOURCE OF FUNDS

Our summary analysis also considered the source of funds, which was identified as follows:

operating income from Café Bonaparte Enr.”	$230,153
operating income from Jardins du Luxembourg"	93 ,897
proceeds of loan secured by commercial pledge	65,000
bank overdraft	15,000
TOTAL:	$404,650 [sic]

The deposit slips we have traced indicate a total of $274,381, or a difference of $130,000. Explanations must be provided by the directors on this difference.

[Translation.]

When questioned by Mr. Marcoux, the appellant was unable to explain the $130,000 difference.

3.14 Mr. Marcoux filed the bankruptcy balance sheet as Exhibit 1-3. It showed liabilities of $684,976.84, assets of $390,039.87, and a deficit of $294,936.97. The same balance sheet was filed as Exhibit A-5.

3.15 The trustee in bankruptcy Marcoux received $17,000 from Mr. Gauvin for the subscribed and unpaid shares of the company amounting to $35,000. At that time Mr. Gauvin had no other assets and, according to the trustee in bankruptcy, legal proceedings would not have served any purpose.

3.16 The accountant Pierre Delisle filed as Exhibits 1-16 and 1-17 the financial statements for March to August 1984 of the two businesses of Les Promenades Centre-Ville Inc., namely Café Bonaparte Enr. and Les Jardins du Luxembourg:

3.17 On September 21, 1984, Mr. Delisle resigned as the result of a disagreement with Mr. Glode. In early November, he received a telephone call from Mr. Gauvin asking him to meet with him. At that meeting or shortly afterwards, to satisfy Mr. Gauvin, he checked the list of the accounts payable of Café Bonaparte Enr. at October 31, 1983 (Exhibit A-18), totalling $37,384, and those of restaurant Les Jardins du Luxembourg (Exhibit A-19), amounting to $130,760.83. These figures had not been prepared by him. However, on seeing the figures he purportedly recommended to Mr. Gauvin that the company declare bankruptcy.

3.18 Mr. Yves Pageau worked for the company from April 1984 to early November 1984, that is a week before the bankruptcy. He began working as manager at Café Bonaparte Enr. In September 1984, Mr. Yves Pageau became manager of the downtown cafeteria. As manager, he "checked the cash” [translation] at the end of the day. He put cash envelopes in his desk and in the morning gave them to the secretary.

Mr. Pageau testified that, two or three times a week after the cafeteria closed, Mr. Weiller came to his office and took $200 to $300. Mr. Pageau also testified that he saw Mr. Weiller take $100 and $200 stacks of money at the Café Bonaparte Enr. He regarded Mr. Weiller as being in charge of the company. Further, he said that in November, 1984 the appellant and Mr. Robert Glode on various occasions sent him to have cheques certified at the National Bank on Charest Boul. “It was”, he said, "from Mr. Marcel Gauvin's account" [translation]. The latter had left for the Dominican Republic. The first time, it was a cheque issued to L.G. Bélanger, a carpenter working in construction, in the amount of $10,000. He stated that Mr. L.G. Bélanger negotiated the cheques and gave Mr. Weiller the money.

Subsequently, another cheque for $14,400 to Denco Inc. was issued and negotiated by Denco before Mr. Yves Pageau. Denco Inc. gave the appellant $10,000 of this amount. A third cheque for $7,000 made out to L.G. Bélanger was handed over to Mr. Weiller in its entirety.

Mr. Pageau also mentioned the problem that at one point employees (some 35 of them) were paid by cheques which were returned by the bank with the notation not sufficient funds" [translation].

3.19 Mrs. France Gadoury testified that she did the accounting for receipts and deposits and that for a time there were no deposits entered in the books and she did not know where the money went. She said that after July 3, Mr. Marc Weiller made deposits for Café Bonaparte Enr. and gave her slips which she said did not always correspond to his sales figure. She testified that she saw the appellant helping himself from the envelopes on several occasions. Finally, Mr. Weiller brought in bills that did not correspond to the total of the money he had taken. Mr. Weiller also asked her to give him $50 and $100 amounts.

3.20 The witness Alain Gingras, the respondent's auditor, in calculating the money missing from the company's income, used over forty exhibits filed during the hearing: sales book, cash book, statement of banking operations, the accountant Delisle’s financial statements, list of accounts payable, cash slips and cash booklets, invoices and so on. Comparing the bank deposits with total receipts (Exhibit 1-11), Mr. Gingras concluded that there was an income shortfall of $164,533.54 (Exhibit I-11, pagel). Furthermore, Mr. Gingras added to this amount four cheques totalling $35,450 ($10,000, $5,600, $10,000 and $9,850: Exhibit 1-13). These cheques were made out to third parties who, Mr. Gingras said, agreed to give the money to Mr. Glode or Mr. Weiller, the purpose being in a remote [sic] way “to obtain small business loans” (Exhibit I-11, page 8) [translation]. The missing income totalled $199,983.54. By a calculation error, Mr. Gingras arrived at the amount of $198,983.54, which the assessor divided in half, including $99,491.77 in the appellant's income and $99,491.77 in Mr. Robert Glode's income.

3.21 Testimony of Mr. Marc Philippe Weiller

3.21(1) At the start of his testimony Mr. Weiller admitted that on October 25, 1985, he was charged on sixteen counts of unlawfully obtaining money from banking or commercial institutions, issuing false documents and so on, chiefly during September and October 1984 (Exhibit 1-41).

3.21(2) The appellant pleaded not guilty and was acquitted on ten counts. Moreover, he admitted that he pleaded guilty to six counts on March 26, 1987 and was sentenced on each count to a $700 fine or two months' concurrent imprisonment (Exhibit I-42). The counts to which he pleaded guilty are charges of unlawfully obtaining money from the National Bank, Les Promenades Centre-Ville Inc. and Cabaret Lido Inc., in various amounts totalling $157,450.

3.21(3) The appellant contended that this guilty plea did not represent the truth and that it was actually a plea bargain.

3.21(4) According to the appellant, he resigned on September 21, 1984 as personnel manager and director. At the urging of other persons he remained head of personnel but was no longer responsible for administration.

3.21(5) The appellant admitted that he did not file his tax returns for the 1982 to 1987 taxation years. The respondent's assessor himself did the appellant's return for the 1984 year at issue on February 27, 1987, following the audit.

3.21(6) The appellant admitted that he put his signature to the agreement of April 2, 1984 (Exhibit 1-15) concluded with Mr. Robert Glode (intervener [sic]) and Mr. Marcel Gauvin and that the latter placed his name “at the appellant's disposal” [translation] for carrying out the "Les Promenades Centre-Ville Inc. project” [translation].

3.22 Exhibit 1-43 was the 22-page minutes of a meeting held on October 29, 1984 and attended by Messrs. Marc Philippe Weiller and Robert Glode, as well as persons having more senior positions in the company's businesses, Yves Pageau, France Gadoury, William Fressange, Vegi Saudane, Nick Mallamo, Gilbert Cadrin, Bernard Lévesque and Suzanne Beauchamp. These minutes contained the following statement by Mr. Weiller at the start of the meeting:

There is only one boss, and that’s me, Marc Weiller. Everything has to go through me and, in my absence, only Mr. Robert Glode will replace me.

All decisions, schedules, employees and so on have to be approved by me.

[Translation.]

There is also a series of decisions. On page 15 of the minutes, there is the following regarding the cabaret:

There are three of us in the company.

Mr. Marcel Gauvin: enters free of charge, must always wear a shirt or a turtleneck and jacket. He signs his bill, and has no orders to give.

Robert Glode and M. Weiller, entry free of charge, sign bills, wear business suits.

[Translation.]

4. Law — case law — analysis

4.01 Law

The principal provisions of the Income Tax Act involved in the instant case are paragraph 15(1)(b) and subsections 152(7), 162(1) and 163(1). They will be cited in the analysis if necessary.

4.02 Case Law

The case law submitted to the Court is the following:

1. Victuni Aktiengesellschaft v. M.N.R., [1980] 1 S.C.R. 580, 112 D.L.R. (3d) 83;

2. Sheinin v. M.N.R., [1967] Tax A.B.C. 56, 67 D.T.C. 86;

3. Danalan Investments Ltd. v. M.N.R., [1973] C.T.C. 251, 73 D.T.C. 5209;

4. Poynton v. The Queen, [1972] C.T.C. 411, 72 D.T.C. 6329;

5. Van Rooy v. M.N.R., [1988] 2 C.T.C. 78, 88 D.T.C. 6323.

4.03 Analysis

The appellant, who had the burden of showing that the assessment made against him was wrong in fact and in law, submitted as his first argument that Mr. Gauvin was not a nominee but was the actual and responsible shareholder.

4.03.1 (a) The appellant admitted signing document 1-15. The wording of this document is clear: "Mr. Marcel Gauvin places his name at Mr. Marc Philippe Weiller’s disposal for completion . . .” [translation] (3.02).

If Mr. Gauvin was acting not as a nominee but as a partner, why did the appellant undertake to pay him 25 per cent of the $200,000 which Mr. Gauvin was to obtain, as indicated in paragraph 4 of Agreement I-15 (3.04), and why did Mr. Gauvin undertake, in paragraph 8 of the same agreement, not to claim any profits from the business’ operations and resale of the project?

4.03.1 (b) The testimony of the trustee in bankruptcy Marcoux alleging that Mr. Gauvin had never told him he was only a nominee is not a very strong argument. A nominee is prima facie responsible to third parties, especially when the non-payment for shares of a bankrupt company is in question. The theory of estoppel applies. Further, the fact that a person makes himself known as a nominee simply gives the creditor a second debtor against whom he can exercise his right to repayment. Article 1716 of the Civil Code is clear on this point:

1716. A mandatary who acts in his own name is liable to the third party with whom he contracts, without prejudice to the rights of the latter against the mandator also.

This fact was noted by Pigeon, J. of the Supreme Court in Victuni Ak- tiengesellschaft (4.02(1)). Mr. Gauvin was well aware of this obligation, since he paid $17,000 for the unpaid shares (3.15) and $18,000 to the bank for the loan which he had signed (3.06).

Furthermore, Mr. Gauvin left no doubt as to his function as nominee. He signed as such twice (1-14 and 1-15). He would have signed in October for a third time if he had been in Québec (3.05). Mr. Gauvin's financial position on February 9, 1984, with an available equity of $753,000 (3.08), placed him in a good position to act as nominee in order to obtain a bank loan.

4.03.2 The appellant's second argument was that he did not have an important part to play.

4.03.2(a) He in fact resigned as a director on September 21, 1984, but he signed cheques until November 4, 1984 (Exhibit I-38), though he contended that he had signed them in advance.

4.03.2(b) Furthermore, on October 29, at the meeting of principal employees, he stated: "There is only one boss, and that's me, Marc Weiller” [translation] and that Mr. Gauvin "[had] no orders to give" [translation] (3.22).

4.03.2(c) Finally, in November 1984 he sent Mr. Pageau to have cheques certified at the National Bank.

4.03.3 The appellant further argued that his guilty plea on six counts of having unlawfully obtained money amounting to $157,450 (3.21(2)) was a plea bargain (3.21(3)) and that it could not be used in this Court.

Where what is concerned is an admission and not a conviction following a trial, a civil court is entitled to treat such an admission as evidence.

However, the appellant pleaded guilty in the criminal case in respect of $157,450, and in the tax case before this Court the amount at issue is $99,491. The evidence did not clearly show whether the latter amount is part of the former and if so what part. For the theory of estoppel to apply in such a case, inter alia, the same matter must have been decided. Here, as in Van Rooy (4.02(5)), this condition cannot be said to have been met.

This Court therefore can only consider the evidence before it, other than this conviction in a criminal court.

4.03.4 In the instant case, the testimony of Mr. Pageau (3.18) and Mrs. Gadoury (3.16), the findings after an exhaustive review of the documents by Mr. Alain Gingras, the respondent's auditor,of an income shortfall of $164,533 (3.20) and the findings of the trustee in bankruptcy Marcoux of a shortage of $130,000 for which the appellant gave no explanation (3.13) lead this Court to conclude that the weight of the evidence is in favour of the respondent's argument. The appellant was unable to discharge the burden of proof upon him.

In the Court's view, there is no doubt that the appellant acted as the true owner of the business, appropriating "funds . . . in any manner whatever" to his own benefit, within the meaning of paragraph 15(1)(b) of the Act.

4.03.5 The five per cent penalty for late filing of the 1984 tax return, totalling $3,833.87, is supported by subsection 162(1), which reads as follows:

162. (1) Every person who has failed to file a return as and when required by subsection 150(1) is liable to a penalty equal to the aggregate of

(a) an amount equal to five per cent of the tax that was unpaid when the return was required to be filed; and

(b) the product obtained when one per cent of the tax that was unpaid when the return was required to be filed is multiplied by the number of complete months, not exceeding twelve, in the period between the date on which the return was required to oe filed and the date on which the return was filed.

The appellant did not file his return. In fact, it was the respondent's auditor who filed it on February 27, 1987 (3.21(5)).

4.03.6 As to the $11,276.11 penalty imposed because the appellant deliberately tried to avoid the tax payable, this penalty is specified in subsection 163(1) of the Act. It reads as follows:

163. (1) Every person who wilfully attempts to evade payment of the tax payable by him under this Part by failing to file a return of income as and when required by subsection 150(1) is liable to a penalty of 50 per cent of the amount by which

(a) the tax sought to be evaded

exceeds

(b) that portion of the amount deemed by subsection 120(2) to have been paid on account of his tax under this Part that is reasonably attributable to the amount referred to in paragraph (a).

The appellant admitted that he did not file returns for the years 1982 to 1987. This penalty is applied when there is a repeated failure to report income. Since the weight of the evidence was that the 1984 income was fraudulent in nature, the penalty imposed for the taxation year at issue is justified.

5. Conclusion

The appeal is dismissed.

Appeal dismissed.